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Know your instruments - Forex, Stocks, Indices, Commodities

Retail traders are now spoilt for choice when it comes to what markets or assets they can trade. It was only a few years ago, that a retail trader only had access to trading the foreign exchange market. But this has changed quite a bit over the years.

Now a days, more and more forex brokers offer their customers a wider choice of instruments that they can trade. While they may all seem the same at a cursory glance, these instruments have different characteristics. Thus, each of the instruments in the different asset classes behave differently and also involve their own independent fundamentals that determine their prices.

In this article, we give a break down of the different asset classes. This will allow you to better understand how you can trade these different asset classes during different times in the market.

But before that, it is important to note that all the different assets are offered as CFD’s, also known as contract for differences. The CFD is a type of a derivative contract where there is no ownership of the underlying instrument.

In short, CFD, be it forex or stocks or commodities are purely speculative instruments.

Forex

The forex or foreign exchange markets are perhaps the most popular of all. The forex instruments belong to the exchange rate or currency markets. The fundamentals that determine the movement in the forex currency pairs broadly depend on>

  • Economy
  • Central bank decisions (interest rates)
  • Balance of payments
  • Geo-political stability

Trading with forex requires lower capital requirements due to the use of leverage. Traders can therefore make more money in the currency markets. But the volatility in the currency markets, comparing to other asset classes is quite low.

Stocks

The stock markets are one of the biggest asset classes right after forex. Depending on your forex broker, you might be given a wide choice of individual stock CFD’s that you can trade. While the U.S. based stocks are widely available, some forex brokers also offer select stocks from other regions such as Europe and Asia.

When you trade stocks CFD’s, the fundamentals differ quite a bit. While the economy plays a role up to a certain point, there are a lot more factors to consider. True, that technical analysis such as a regular moving average and an oscillator based trading strategy will also work for stocks.

But it is important that traders also pay attention to the fundamentals as well. Some of the factors that determine the volatility in the stock markets include:

  • The company’s earnings report
  • Financial ratios
  • Regulation, trade related news events

Indices

The indices CFD markets are closely related to the stocks themselves. However, unlike individual stocks, when you trade an index CFD, you are speculating on the benchmark stock index. Some of the leading index CFD’s include the Dow Jones 30, S&P500.

Some forex brokers can also offer you the choice to trade on other indexes such as the Nikkei 225, the ASX and so on. Trading on indexes requires that the traders understand the broader market developments for the region in question.

Here are some of the factors that determine the volatility in the index CFD markets:

  • Economy
  • Government regulation
  • Monetary policy

Commodities

Last but not the least, we also have the commodity markets. Commodities is a broad umbrella term and can be further classified into:

  • Metals
  • Energy
  • Agriculture
  • Softs

The commodity markets are primarily dominated by the futures trading. But note that the commodities you see being offered from your broker are commodity CFD’s. Once again, these are speculative instruments, therefore unlike futures, you do not have any ownership of delivery of the underlying commodity in question.

As a result, the leverage and margin requirements for trading commodity CFD’s are a lot lower as well. The commodities are very volatile, but the trends are well established. Some of the factors that influence the commodities are:

  • The U.S. dollar
  • Seasonal reports (weather, farming, supply & demand)
  • Geo-political factors

As outlined above, it is essential that a trader has a good understanding of the different instruments that are available from their MT4 broker. Choosing one instrument over the other requires a completely different approach.

The difference in the contract sizes also varies a lot depending on which instrument you choose to trade.

Of course, in the short term, the technical analysis might be the same for most of these instruments from different asset classes. But having said that, traders can further diversify their trading into such instruments. This will allow them to better navigate the markets.

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